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United States Securities and Exchange Commission v. Veros Farm Loan Holding LLC

United States District Court, S.D. Indiana, Indianapolis Division

February 16, 2017

United States Securities and Exchange Commission, Plaintiff,
v.
Veros Farm Loan Holding LLC, Tobin J. Senefeld, FarmGrowCap LLC, PinCap LLC, and Pin Financial LLC, Defendants. Offering Type of Offering Amount Invested /Loaned Amount Paid to Investors and Source of Payment Amount of Principal Outstanding

          ORDER

          Hon. Jane Magnus-Stinson, Chief Judge

         In April 2015, the United States Securities and Exchange Commission (“SEC”) initiated this action against Veros Partners, Inc. (“Veros”), an SEC-registered investment advisor located in Indianapolis, Indiana, three individuals who performed work by or on behalf of Veros, and several entities that issued securities through Veros. On May 1, 2015, the Court entered an Order appointing William Wendling, Jr. to serve as the Receiver over Defendants Veros Farm Loan Holding LLC (“VFLH”), FarmGrowCap LLC (“FarmGrowCap”), PinCap LLC (“PinCap”), and all private offerings where Veros controlled investor funds (the “Private Offerings”). [Filing No. 34.] On May 7, 2015, the Court issued a preliminary injunction enjoining further securities law violations by Defendants. [Filing No. 48.]

         After collecting assets on behalf of the receivership, the Receiver filed a Motion for Authority to Make Interim Distributions to Investors of Veros Farm Loan Holding LLC and FarmGrowCap LLC, [Filing No. 259], the Court granted the motion, [Filing No. 269], and the Receiver moved forward with distribution by providing preliminary information to investors. Subsequently, a group of investors in one or more of the Private Offerings (the “Interested Investors”) filed an Amended Motion to Stay and Objection to Interim Distribution Methodology, objecting to the Receiver's distribution methodology and plan. [Filing No. 312.] A hearing was held on February 8, 2017, and the Court now rules on the motion.

         I.

         Background

         A. The Lawsuit

         The SEC initiated this action on April 22, 2015, [Filing No. 1], and filed the operative Amended Complaint on June 11, 2015, [Filing No. 57]. The SEC alleges that Veros and its President fraudulently raised at least $15 million from at least 80 investors through two separate farm loan offerings (the “2013 Offering” and the “2014 Offering”). [Filing No. 57 at 1.] The SEC alleges that investors purchased securities issued through the 2013 Offering and the 2014 Offering after being informed that their funds would be used to make short-term operating loans to farmers for the 2013 and 2014 growing seasons, but that significant portions of the loan proceeds were actually used to cover the farms' prior, unpaid debt, to pay investors in other offerings (including an offering in 2012 (the “2012 Offering”)), and to pay the individual Defendants. [Filing No. 57 at 2.] As of the filing of the Amended Complaint, the SEC alleges that less than $5 million of the approximately $12 million in loans owed in connection with the 2014 Offering had been repaid, and that all but one of the loans in the 2014 Offering were past due. [Filing No. 57 at 3.] The SEC alleges that the loan defaults and impending investment shortfalls were not disclosed to investors in the offering material. [Filing No. 57 at 3.]

         The SEC sets forth claims for: (1) violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5 against all Defendants; (2) violations of Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1), against all Defendants; (3) violations of Sections 17(a)(2) and (a)(3) of the Securities Act, 15 U.S.C. § 77q(a)(2)-(3), against all Defendants; (4) violations of Sections 206(1) and (2) of the Investment Advisers Act, 15 U.S.C. § 80b-6(1) and 6(2), against Defendants Matthew Haab and Veros; (5) violations of Sections 206(4) of the Investment Advisers Act, 15 U.S.C. § 80b-6(4), and Rule 206(4)-2, 17 C.F.R. § 275.206(4)-2, against Veros; and (6) unjust enrichment against Relief Defendant Pin Financial LLC. [Filing No. 57 at 26-30.]

         The SEC reached settlements with Mr. Haab, Mr. Risinger, and Veros. Trial against the remaining Defendants is set for April 10, 2017.

         B. Amounts Invested, Paid, and Owed

         At the February 8, 2017 hearing, the Interested Investors, the SEC, and the Receiver clarified the amounts associated with the different Offerings, payments made on loans associated with the Offerings and the source of those payments, and the amounts still outstanding. Additionally, the Declaration of Jarit Loughmiller (an accountant at Blue & Co. LLC (“Blue”)) submitted by the Receiver, and the Declaration of Craig McShane (an SEC Staff Accountant) submitted by the SEC, are particularly instructive. [See Filing No. 316; Filing No. 318.] To provide important context for comparing the Receiver's distribution plan to the plan proposed by the Interested Investors, the Court summarizes the information it gleaned from the February 8, 2017 hearing and the parties' submissions. The Court's discussion should not be construed as findings of fact, for use at trial, but rather as findings for purposes of evaluating the Interested Investors' motion only. The following table sets forth the Offerings and relevant amounts.[1]

Offering
Type of Offering
Amount Invested /Loaned
Amount Paid to Investors and Source of Payment
Amount of Principal Outstanding

2012 Offering

Specifically targeted for loans to two farms: Crossroads and Kirbach

$4.8 mil. raised

• $3.37 mil. from 35 investors loaned to Crossroads

• $1.47 mil. from 24 investors loaned to Kirbach

All investors have been paid back principal and interest

• $2, 792, 563 paid from 2013 Offering

• Crossroads and Kirbach eventually paid most outstanding amounts

None

2013 Offering

Pooled investment

$9.664 mil. raised from 65 investors - $13.3 loaned to 8 farms (some re-loaning occurred as loans were paid off)

• $1.8 mil. to D&S

• $635, 000 to Rosentreter

• $1.25 mil. to True Blue Berry

• $3.32 mil. to RJW Williams

• $3.875 mil. to Crossroads

• $1 mil. to Boyer

• $425, 000 to Kirbach

• $1 mil. to Bassen

• All farms but RJW Williams (owes $1.564 mil.) and Bassen ($435, 000 written off) have paid in full

• $1, 408, 816 from 2014 Offering used to pay investors

None

2014 Bridge Loan

Single loan

$5.2 mil. raised from 24 investors - loan used to bridge 2013 and 2014 Offerings

$5.334 mil. (principal and interest) repaid. Payment likely came partially from farm borrowers in 2012 and 2013 Offerings

None

2014 Offering

Pooled investment

$10, 945, 482 raised from 83 investors - $13.1 mil. loaned to 5 farms and Pin-Cap (some re-loaning occurred as loans were paid off)

• $1.3 mil. to D&S

• $2.8 mil. to Rosentreter

• $200, 000 to True Blue Berry

• $3.4 mil. to RJW Williams

• $1.1 mil. to Boyer

• $360, 000 to PinCap

Only D&S has repaid in full. Rosentreter owes $1, 473, 000; True Blue Berry owes $262, 000; RJW Williams owes $1, 391, 000; Boyer owes $1, 168, 000; PinCap owes $480, 000

$7, 865, 486.95

         C. The Receiver's Distribution Plan

         After the Court appointed Mr. Wendling as the Receiver, he hired Blue, with Court approval, to “assist with, among other things the administration, analysis and ongoing monthly accounting and bookkeeping of the businesses of the Receivership Defendants; to prepare monthly reports to the investors/lenders; to assist with the review and analysis of the Receivership Defendants internal accounting records for accuracy and completeness and of the internal investor/lender records; to prepare reports and conclude on findings regarding the Receivership Estates; and to perform other ongoing business services required to maintain and operate the Receivership Estates during the pendency of this matter.” [Filing No. 259 at 2-3.] The Receiver instructed Blue to “perform a forensic examination of the books and records of VFLH and FarmGrowCap as well as each individual investor account for the years 2012, 2013, and 2014.” [Filing No. 259 at 3.]

         The Receiver set forth a three-phase Proposed Distribution Plan (the “Receiver's Plan”), which he summarized as follows:

a. The Receiver will contact each investor individually to summarize and provide from the accounting review the:
• Amount invested in [the Private Offerings];
• Payments received; and
• Remaining amount of each investor's capital.
Investors will be requested to respond within thirty (30) days and provide any supporting documentation to outline/identify any discrepancy or dispute related to their contributions or payment received. After this period of time, any discrepancies or disputes which the Receiver ...

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